BLUE FOODS Case Analysis

Indian Restaurant Industry

• Restaurant Industry in India is large and rapidly growing• Highly fragmented (only 10% is

organized). Single unit restaurants dominate the landscape. Liberalization led to entry of foreign players into the market• Fast growth rate of food services

industry( 25%)• No nationwide presence of brand

in multiple formats. Space for significant growth

• Increasing disposable Income• Change in Indian consumers

eating habit. Infrastructure growth. Malls and shopping clusters rise has provided space for restaurants and food courts

• Favorable demographics. Increasing women workforce and nuclear families is creating strong culture of eating out

• Increased penetration of organized retail is driving spending on eating out

• High cost of real estate • High competition from local

shops• No single window clearance

for establishing restaurants. Cumbersome licensing requirements (10-15 licenses)

• Below par transportation and cold storage logistics in India

• Lack of skilled manpower. Inconsistency in service delivery

• High cost of sourcing food items. Local suppliers issues

Industry Overview Drivers Challenges

Organized10%

Unorganized90%

Total market size (US $ 16 billion)

Restaurant Industry

Quick-service restaurants

(QSR)

Fine-dining restaurants

Coffee shops

Ice-cream parlors

Specialty restaurants

Company Overview

• Incorporated in year 2001. One of the largest F&B players serving across multiple formats by 2008• Average ticket size ranging from 100-750• Wide range of offerings. (Value –for-money to expensive

dining options). Early mover advantage• Decreasing profits. Negative PAT in 2007 and 2008.• Firm has heavily relied on debt financing to increase

revenues without achieving operating efficiency. Less favorable macroeconomic conditions have worsen Blue Foods financials. High financial distress

Year 2006 2007 2008

Revenues (in millions) 405 590 890

EBITDA 25 -60 -280

PAT 5 -105 -405

Debt 120 170 710

Revenue growth -- 45.7% 50.8%

Increase in Debt -- 41.7% 317.6%

Brands/Parameters Average price per customer(APC) in Rupees

Restaurant Category Target Markets/Customers Locational Availability

Pasta 1000 Fine Dining Tier I Cities/ Students, young and professionals High end malls; Prime city locations

Dhaba800 Casual Dining Tier I and some Tier II Cities/High income Families High end malls; Prime city

locations

Gelato 30-100 ( per scoop) QSR Tier I Cities/ Students, young and professionals Prime city locations and high

traffic areas

Mumbai400 Casual Dining Tier I and Tier II cities/Students, young and professionals Near offices ( esp. IT and SEZs)

and colleges

Kaapi & Chai 300 Café and QSR Tier I cities/ Young professionals and high income families Elegant or stylishly luxurious

localities

Noodles 600 Casual Dining Tier I and some Tier II Cities/high income families High end malls; Prime city

locations

Bharat Food Court250 Food Court Tier I and some Tier II Cities/Students, Young

professionals and Middle income FamiliesAll Shopping malls , cooperate

offices and colleges

Major Focus Area Problems Impact

StrategyNo well articulated expansion plan; wrong locations of restaurants; heavy reliance on debt financing( From 3.4 in FY 7 to 14.2 in FY 8)

• Excess capacities at various places • Unprofitable units• Lesser monitoring and high

inconsistency of customer experiences across stores

No centralized purchasing; strained supplier relationships; erratic outlet level procurement of material; high cost of operations (Food cost higher than 40% of sales; Lease rentals more than 33%; manpower cost more than 20% )

• Non standardization leading to high cost • No accounting for wastes affecting

profitability• More financial leakages at store level• Steep fall in EBITDA (From 0.5 in FY 6

to – 5.6 to FY 8)

Organizational Structure

Operations

Training

Ads and Marketing

Several overlaps in organization structure; no fixed structure and no employee incentive plan; no fixed business plan

More focus on day to day operational inefficiencies; High attrition rate

Absence of comprehensive marketing plans for each format

• Confused planning and execution framework• Low employee morale and lack of role

clarity at various levels

• Reduced performance in frontline execution and service delivery• High hiring, training and other

overhead costs.

• Insufficient marketing attention on any specific format

Short-Term Strategies to Revive Blue Foods

Asset Reduction Halt Expansion Streamline Operations

Change Organizational

Structure

1. Asset Reduction

Location AnalysisIdentify underperforming assets (low cash flows, high rent)

Close down underperforming assets. Reduce number of outlets in Tier II cities

• Firm is suffering from heavy financial losses. Better to close down loss making units• Location analysis should be carried out to identify rent and market conditions. • Detailed strategy plan to close down underperforming units where possibility of economies of scale is minimum

and achieving operational efficiency in 3-4 months is not possible (mostly Tier II cities). Bharat Food Court and Gelato can perform relatively better in small cities

Improved Return on Capital Employed (ROC)

Decreasing Losses and Increasing Profitability Implementation

2. Halt Expansion

Halt restaurant expansion plans

Sell off closed assets

Use cash flow from proceeds to pay off part of debt

• Reduced Interest Expense• Less level of Debt in the Capital

Structure• Bankruptcy Cost goes down

• L:ack of capital investment plans has led to opening of restaurants without considering demands factors and cost • Halt any expansion plans of restaurant units before stability of cash flows could be achieved

3. Streamline Operations

Changing MenuIncrease operational efficiency of existing facilities

Centralized procurement

• Reduced food cost• Reduce wastage• Faster Service• Tractability, food consistency

and profitability

• Short term removal of items from menu to cut down on food cost and reduce materials wastage• Increase operational efficiency of existing restaurants to do faster service to customers. Increase in customer

satisfaction. • Centralized procurement system by collaborating with nation-wide supplier. Reduced procurement cost,

standardization of products across units and better inventory management• Collaboration with logistics provider. Use of centralized kitchen to prepare basic items for all restaurants in

surrounding areas. Reduction in waste. Improved operational efficiency at centralized level

4. Change Organizational Structure

Reduce employee base by firing employees in non key positions

Design organizational hierarchy with specific roles

Bring in new managers to oversee the turnaround process

Employee training. Linking salary of managers to performance

• Reduction in salaries and wage expenses

• Clarity of roles and responsibilities. No overlaps

• Good service delivery. Low attrition rates

CEO

Production Purchasing Operations MarketingHR

Implementation Process

Asset Reduction

Halt Expansion

Streamline Operations

Reorganization

Marketing & Advertisement

Training & Development

Day 1 Day 100

Assess and develop roadmap

Implementation

Minimum Activity

Success Factors

Employees• Training • Motivation level• Incentives & Benefits• Personality and passion

of employees

CSFsLocation

EmployeesManagement

Products & Services Infrastructure

Customer Satisfaction

Location• Easy accessibility• Parking facility • Visibility and

surrounding environment• Competition from

other players

Infrastructure• Decor design creativity

and uniqueness• Comfortable seating• Entertainment

mediums (TV, music)• Lighting; Exteriors &

entrances

Company/ Management

• Brand image; Targeted Value proposition and marketing• Buying leverage;

working capital; Costs and Gross margin• Staff retention;

management ability

Products & Service• Quality food; Customer

satisfaction• Cuisines; variety; pricing • Service efficiency and

accuracy• Upkeep and Hygiene

Long-Term Strategies for Blue Foods

Create an Authentic Brand• Establishing and communicating a clear and compelling vision for each Blue Foods Brand.• Consistent and authentic character across units.

Outstanding Food• In the end only good quality and delicious food matters to consumers• Use a single quality supplier for basic food ingredients like meat, vegetable, dairy etc. This will help in improving quality,

consistency and reducing cost. Quality of starters and sweets should also be high.

Quality Menu• Indian customers give preferences to food items they that are difficult to cook at home( must include these preference items).• Adding more items complicates menu and confuses customers. Provide a good variation of local and other cuisines based upon

customer demographics. Sweets which is popular among Indian masses is must include item in the menu.• Innovate and provide variety while reducing cost (Menu having broad customer appeal and few items). Quality menu will

increase traffic and improve execution.

Superior Service• Quality service requires energy, passion and focus. Develop by creating sense of ownership among restaurant

workers• Training and development is required for restaurant workers from kitchen staff to managers. Clarity among staffs

personnel and mangers with regard to responsibilities and accountability. • Recruit talented, skilled and experienced managers from outside market.

Incentives for Managers• Mangers are the most important individuals in a dining company. Empowering managers and creating ownership will

help Blue Foods build an operationally focused organization and encourage new ideas to improve restaurants.• Incentives tied with traffic growth and cash flows.

Manage Food Costs• Centralized purchasing to reduce material cost. Centralized kitchen system in major cities to realize economies of

scale in preparing base for food items (e.g.. Boiling meat). • Collaborate with nationwide supplier and good logistic providers.

Innovate• Continuous benchmarking the firm with industry standards. Continuously innovate in food development,

ambience• Provision for secondary services like private community space for organizing local events( e.g. birthday parties),

corporate events and banquet.• Alcohol serving in fine dining restaurants, installation of big screen TVs (playing matches), playing music etc. • Blue Foods has several brands. Launching loyalty cards will help customers identify other brands as well as

increasing purchases from other brandsMarketing and Advertisement• Understand how different marketing channels can be leveraged for specific brands. Need for fast and accurate

response.• Content mix of TV, print advertising, website, word of mouth, mobile, social media (less in 2008) and in store

activities• Message should provide utility for customers. Provide useful information about the brand, food, locations and

recipes.• Build relationship with food bloggers, reviewers and influencers.

Pricing• Price Sensitivity is high among Indian customers• Blue Foods should see that its brands are not overpriced with respect to customers. Provide affordable options to

customers.• Provide a compelling value proposition, not just based on price.

Demographics• Develop insights about various customer segments, needs and relevant atmosphere for satisfying experience• Menu offerings taking into neighborhood and community needs ( i.e. Local food items).

Future Expansion Plans• Previous expansion plans with excessive debt financing led to heavy financial burden and operational losses.• Any new expansion plan has to take into account the lease rental rates, demand conditions and supply chain

issues in cities. Also stability of cash flows has to be taken into consideration before launching new units• Debt level should be maintained at industry levels. Equity financing can be used for future growth.• Blue Foods could also fuel its growth through franchisee model (most beneficial for Tier II cities).

• Promotion of Tier II & III cities• Implementing strategies to

regain normal business across outlets, Streamline operations, Improved customer service and customer satisfaction, Shift towards management contracts

• Brand re building via ads and marketing

• Identification of untapped segments, Focus on CRM, Diversification and Addition of new Capacity

• Tier I Cities Focus only on Metros -Delhi, Mumbai, Hyderabad, Bangalore & Chennai

• Identify and do away with under performing assets and excess capacities. Focus on removing operational inefficiencies like erratic store level procurement etc.

• Hire new management team and develop a turn around strategy to attain solvency.

• Revenue growth and Maximization, Customer Acquisition

1st Year

• Future expansion plans in Tier II cities. Adoption of Franchisee model

• Use of technology into the operations to improve operational efficiency

• Refurbishments & Expansions under brands and emergence of new domestic brands/concepts

• Focus on customer retention, diversification into new business

• Loyalty factor, Product Enhancement

2+ years

1-2 yearGeographical Penetration

Operations

Investment Needs

Strategic Focus

Future Strategies

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